1.31     Query

Treatment of expenditure incurred on construction of godowns for self and on behalf of others

1.  A government warehousing corporation, apart from running and maintaining warehouse, also undertakes the construction of godowns for self and also on behalf of others viz., the Food Corporation of India, which however are utilised by the warehousing corporation.

2. In respect of godowns constructed for the FCI, the corporation charges certain percentage for overheads and debits the direct costs to such godowns. The cost of constructing these godowns is met out of the funds provided by the Government of India to the Food Corporation of India, which passes the same to the warehousing corporation. 50% of the finance is interest bearing, while the remaining 50% bears no interest. The said amount is shown under the head  Borrowings from Food Corporation of India for Base Depots . These godowns are used by the warehousing corporation and are to be transferred by the FCI after 15 years on payment by the corporation an amount equal to written down value less the total loan instalments paid during 15 years. The cost incurred on such godowns is not shown under fixed assets, except land, but is disclosed separately as  Deposit Works . No Accounting entry is made for depreciation thereon in the books of the corporation.

3.The querist has supplied the following additional information in this regard:

(i) There is no specific clause as regard ownership except by inference that the godowns are to be transferred at written down value after 15 years. It can therefore be presumed that the legal ownership is that of FCI. However, no title as such is transferred except that the FCI is informed of the progress and completion.

(ii) Repairs and maintenance charges in respect of the godowns constructed on behalf of the FCI are incurred and borne by the corporation. However, the maintenance, repair and operational charges for the railway sidings annually charged by the Railways from the corporation during the 15 years period referred to above would be reimbursed by the FCI every year (This is in view of the fact that the corporation normally does not provide railway sidings facility and this is a special facility extended by them to the FCI). The corporation would allow the proportionate rebate incase the railway sidings are used for the benefit of customers other than the FCI.

      (iii) The interest liability continues even after completion of godowns in respect of funds provided by the FCI.

      (v) Subject to the foregoing adjustments, the corporation would charge the FCI for the storage charges in respect of these depots at the same uniform pooled rate and on the same conditions as applicable to other godowns from time to time.

      (vi) For working out the pooled storage charges leviable from year to year during this 15 years period, the depreciation charges in respect of these godowns would not be accounted by the corporation since these charges would have been borne directly by the FCI.

      (vii) The guarantee of occupation of these godowns would also be 10% for the full period of 15 years, since these godowns are formally owned by the FCI during this period and the corporation is only managing the same.

3.In respect of godowns constructed for self, the entire direct expenditure including salaries, materials and other expenditure is capitalised and the Head Office overhead expenditure is pro-rata charged to the godowns, in the ratio of direct costs, irrespective of the fact, that certain expenditure can be directly allocated to the different centers. In the view of the querist this results in un-scientific capitalisation of such expenditure in respect of specific centres which number 15. This results into inaccurate cost ascertainment of not only one godown but different godowns at relevant centres.

4. In the income and expenditure accounts, salaries, materials etc. are not disclosed, and the entire expenditure is directly debited to godowns. supplied in functional accounting heads is though available, no such disclosure of expenses is made under these heads. The Act requires disclosure of expenses under functional heads, and since the amounts involved are material, it is the view of the querist that such expenditure should be disclosed under functional accounting heads at gross values and the expenditure capitalised separately disclosed as deduction therefrom.

5.The cost of godowns (which number over 400) is shown under one head  godowns . The corporation maintains register of each godown. In the view of the querist though the total cost of the godowns may be correct, but due to unscientific capitalisation, the cost of each godown will be incorrect.

6. The corporation, in respect of materials stored in godowns for construction, raises storage bills and shows the same, on the one hand, under the head   Income and then capitalises the said notional charge.

7.The querist has sought the opinion of the Expert Advisory Committee on the following matters arising from the above facts: -

(i) In view of the materiality of amounts, will it not be necessary to show the expenditure under functional heads at gross amounts and specific disclosure made for expenditure capitalised as deductions therefrom?

(ii) Will it not be necessary to show expenditure on cement, steel etc. in the expenditure account rather than taking the entire expenditure to the Balance Sheet?

(iii) Whether the supervision charges recovered in respect of godowns of others viz., FCI, should be shown as income or as deduction from the costs of own godowns?

(iv) In case of the godowns constructed on behalf of the FCI, but used by the corporation and which are to be transferred at written down value after 15 years, how the relevant disclosure in this regard should be made keeping in view the fact that the corporation is not charging any depreciation?

(v) Should the interest charges paid to Food Corporation of India in respect of borrowing for constructing their godowns, be capitalised or such interest be claimed as a revenue expense?

(vi) What is the auditor s obligation in the case that though the cost of all godowns taken as a whole is correct, but the cost of each godown taken as per the register of fixed assets is incorrect? Whether it is not obligatory on the corporation to determine the cost of each godown more scientifically as each godown is an independent asset.

(vii) Whether the treatment of notional income for storage of goods for construction kept in own godowns, as income on the one hand, and, on the other, capitalised to godowns is in order.

                                                                    Opinion                                                 October 9, 1987

1.  The opinion of the Committee on various matters raised by the querist in para 7 above is as below: -

(i) The direct expenditure incurred on the construction of godowns is not necessary to be shown separately in the profit and loss account in terms of the respective functional heads. However, indirect expenditure incidental and related to construction should be shown under respective functional heads and allocated suitably.

(ii) Expenditure on cement, steel etc. where incurred for construction of godowns should be directly capitalised.

(iii) Supervision charges recovered in respect of godowns constructed for others viz., the FCI, should be shown as income.

(iv) The Committee is of the opinion, from the facts of the query, that the rewards incidental to ownership are substantially enjoyed by the corporation in respect of the godowns constructed on behalf of the FCI, even during the first 15 years during which the legal owner ship does not vest with the corporation. Accordingly, such godowns should be considered as the fixed assets of the corporation on the basis of 'substance over form'1 , consideration of preparation of accounts. The Committee is of the opinion that these should be shown separately under the head Fixed Assets and for accounting purposes depreciation thereon should be provided in the accounts of the corporation even during the first 15 years of the completion of construction of godowns. The Committee is further of the opinion that amount equivalent to depreciation should be adjusted against the borrowings from FCI every year with a corresponding credit to income as the storage charges determined to be recoverable from the FCI do not include the depreciation element, apart from the annual instalment paid to FCI. Any balance remaining in the Borrowings from FCI Account at the end of 15 years should be adjusted in the profit and loss account of that year.

(v) Interest charges relating to the period of construction should be capitalised as the cost of godowns. Interest charges relating to the period after completion of construction should be treated as a revenue expenditure.

(vi) The Committee is of the opinion that in case the auditor is satisfied that cost apportionment to different godowns is not proper which may materially affect the true and fair view of the profit or loss through improper charge of depreciation due to completion of godowns at different times and the state of affairs as per the balance sheet, he may qualify his report quantifying the impact thereof, as suggested in para 10.3 of the Statement on Qualifications in Auditor s Report issued by the Institute of Chartered Accountants of India.

(vii) The Committee is of the opinion that notional income in respect of storage of goods for construction in own godowns should neither be recognized as income nor as part of the cost of godowns.